Tax agency ‘has always maintained’ a policy of enabling MTD users to access services via tools created by third parties, according to new exchequer secretary to the Treasury Dan Tomlinson
The market for software tools to support HM Revenue and Customs’ Making Tax Digital regime would be “undermined” by an alternative product developed by the department itself, a minister has claimed.
HMRC began the implementation of the digital tax system in 2019, since when those mandated to file tax returns online have also been required to implement a compatible third-party software tool. Online records on GOV.UK show that there are currently 461 such platforms available for use by companies or tax agents filing VAT returns. These programs serve different precise needs or levels of complexity, and include 30 that are available free of charge, primarily for use by those with simple tax affairs.
HMRC is currently in the midst of a two-year testing process ahead of the MTD regime being extended from 2026 to go beyond VAT and into income-tax returns submitted by the self-employed and landlords, or agents acting on their behalf.
Ahead of this expansion, ministers were recently asked – by Liberal Democrat MP Jess Brown-Fuller – whether they might “make an assessment of the potential merits of HMRC developing Making Tax Digital software without using third-party providers”.
In response, exchequer secretary to the Treasury Dan Tomlinson indicated that the tax department will maintain its long-standing approach – and that deviating from this would actually be harmful to the market for software tools used by businesses and citizens.
“HMRC has always maintained that it would not offer its own software products for Making Tax Digital,” the minister said. “This helps to ensure a competitive market which will better support taxpayers with a flexible and tailored range of software that integrates with other business management tools. This includes free and low-cost options, which would be undermined by an HMRC-produced solution. Third-party developers are also well placed to build the necessary help and support within their products that is particularly important for unrepresented customers or those who do not already use digital tools to manage their affairs.”
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Digital reporting first became mandatory six years ago for all firms with annual revenue higher than the applicable VAT-registration threshold – which is currently £90,000. The programme was extended in 2022 to encompass all firms liable for VAT.
After a postponement of two years, from 6 April 2026 the scheme is scheduled to extend to income tax payments made by individuals and microbusinesses earning more than £50,000 a year. In April 2027 this threshold will be lowered to £30,000.
Another Lib Dem MP, Richard Foord, asked whether the department would “consider delaying implementation until issues associated with the cost, software availability, administrative burden and digital exclusion have been addressed”.
“HMRC are on track to implement MTD for Income Tax for those with income over £50,000 from April 2026, with a wide range of customers already testing the service in live running,” Tomlinson replied. “MTD modernises the tax system and will help self-employed individuals and landlords keep on top of their tax affairs, making their annual tax returns easier. While many users will incur some cost in moving to MTD for Income Tax, many will also experience wider productivity gains through time savings and greater accuracy.”
The department strives to “continually monitor” financial and other impacts of the digital tax programme, and the minister pointed Foord to the latest published assessment of these effects.
Tomlinson added that those with legitimate claim may be granted an exemption from mandatory digital reporting – with a formal application for such dispensation to be established shortly.
“The government has worked with the software industry to ensure there are free and low-cost software options available to support taxpayers, both represented and unrepresented, alongside a wider range of software choices to suit varying needs and budgets,” he said. “The government recognises that not everyone is able to interact with HMRC digitally. Taxpayers who are digitally excluded will be able to apply for an exemption from MTD. HMRC will provide further information about the exemption process in due course.”
Earlier this year HMRC published the final evaluation on the Making Tax Digital for VAT programme, in which the department contended that the initiative “successfully delivered against its objectives” across the board. However, the detailed statistics contained in the assessment paint a more mixed picture, with a quarter of small businesses reporting that the costs of compliance have outweighed the benefits realised.
